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What Is a Money Purchase Plan?

Unlike defined benefit plans, defined contribution plans do not promise a specific benefit amount when you retire. Instead, your employer makes contributions to your individual account that are invested on your behalf. Your retirement benefit is the total of the contributions, earnings, and appreciation of the investments in your account.

In a money purchase plan, your employer is required to contribute a fixed amount to your account each year.

One type of defined contribution plan is called a money purchase plan. In a money purchase plan, your employer is required to contribute a fixed amount to your account each year. Contributions must be deposited by 8½ months after the plan year's end. Distributions must be offered in the form of joint and survivor annuities. With the consent of the spouse, other distribution options may include lump sum or installment payments.

The most that can be contributed to a money purchase plan by an employer is 25 percent of an employee's pay, up to a maximum of $46,000 in 2008 (up from $45,000 in 2007). The benefit of this high contribution limit must be weighed against the fact that annual payments must be made at the selected contribution level each year, no matter how well or poorly a company is doing financially. Employees are not allowed to contribute to a money purchase pension plan.